Internet sales tax: Maryland should tackle the digital divide

There's no denying the convenience and simplicity of shopping online. Successful retailers like Amazon.com and Overstock.com have become giants as a result. Small wonder that online sales have grown to an estimated $200 billion annually, or about 7 percent of all retail transactions that take place in this country.

But should taxpayers be forced to subsidize the industry? That's essentially what happens now as the bulk of digital sales are not subject to state and local sales taxes. Not only does it give virtual commerce a big advantage over their Main Street competitors but it means that states have to balance their budgets with revenue from other taxes instead.

Recently, Gov. Martin O'Malley formally requested Comptroller Peter Franchot study how much Maryland is losing out on Internet sales and what can be done to collect that missing sales tax. Here's what he's likely to find: At least $160 million annually in uncollected taxes based on earlier review by the General Assembly's budget analysts.

Of course, collecting the money is another matter. Because of a 1992 Supreme Court decision, states can collect sales tax only from online (and catalogue) companies that have a physical presence in the state. Many do not.

But the success of digital shopping — and the reality of state government budget deficits — have renewed interest in closing this loophole. Momentum is growing to find some compromise that would allow states to collect a sales tax without unduly burdening Internet retailers.

Not that online retailers are willing to give up their competitive advantage without a fight. As states have begun pressuring companies like Amazon.com to fork over the money, the company is moving to close warehouses or ending relationships with affiliates to remove their presence in those states.

Some states like New York are pushing collections while others are capitulating to the industry. Texas Gov. Rick Perry (a potential Republican presidential candidate) recently vetoed legislation that would have made more Internet companies subject to his state's sales tax by counting warehouses and distribution centers as a physical presence.

But in vetoing the bill, Governor Perry also acknowledged that something needs to be done to make the system fair. That will require action by Congress where, unfortunately, Republicans appear loath to take any action that might be construed as a tax increase.

Of course, this is nothing of the kind. Rather, it's an acknowledgement that Internet retailers no longer require the sales tax exemption that might have seemed appropriate for the fledgling industry 19 years ago. Allowing that advantage to continue is a jobs killer — mom and pop stores that pay taxes and employ local residents are getting the short end of the stick.

One promising alternative is an ongoing effort to create a streamlined sales and use tax — a standardized sales tax nationwide. So far, 24 states have signed onto the agreement. Maryland, however, is not one of them.

Why not? In part, because the agreement requires standards that might not work in the state's favor. For instance, Maryland's current sales tax rounds up while the other states favor rounding down — a seemingly trivial difference that can add up to millions of dollars. Maryland's recently-enacted 9 percent sales tax on alcohol is a problem, too, as the agreement calls for a single tax rate (not necessarily the same rate as other states but one that's not variable from product to product). Even so, the agreement would require the blessing of Congress, which remains unlikely.

While Mr. Franchot's study will certainly provide needed ammunition in any conversation about sales tax enforcement, Governor O'Malley should be prepared to take the next step and back legislation like that recently vetoed by Governor Perry. Similar bills have died in Annapolis in recent years at the committee level. But while that approach won't produce anything close to $160 million in revenue, it would begin to close the fairness gap and protect Maryland-based retailers from unfair competition.

Online companies have long complained that sales taxes are too complex to navigate on a national scale. Yet, some national retailers like L.L. Bean and Victoria's Secret, with both stores and online catalogues, are able to do it. Why can't Amazon.com?